Fintechs in trouble as banks plot market takeover

BY EMEKA EJERE

Recent financial reports of Nigerian banks suggest that their strategic investments in financial technology (fintech) businesses is paying off, with increasing market shares contributing significantly to the strengthening of their balance sheets.

This is putting the valuation of fintech firms in the country under the spotlight, with the new reality being that they now have to work extra hard to survive a raging industry war from the traditional banks.

Around 2017, when fintech companies were seen as major disruptors in financial services, it seemed obvious that they posed a serious threat to the reign of the traditional banks. But the banks fought back and are now taking control of their future through deliberately building capacity in fintech businesses.

Nigerian fintech companies have been the most funded tech companies in Africa since 2020. According to a report by Disrupt Africa, the total funding raised by Nigerian fintech companies in 2020 was $89.34 million. This improved significantly to $536.66 million, and $1.2 billion in 2022. The increasing funding activities have also meant that a few of the fintech companies saw high valuations, sometimes higher than some Tier 1 banks in Nigeria.

For example, in 2021 when OPay raised $400 million from venture capitalists, which pushed its valuation to $2 billion, report said it was worth more than five of the country’s top five biggest banks. While the high valuation positions the fintech ecosystem as the most attractive segment of the emerging tech ecosystem, they also serve as a wake-up call for the traditional banks that there is much value they have left uncovered, which if ignored, could decide who controls the market in the nearest future.

However, emphasis on high valuation is reducing as venture capitalists and private equity investors reevaluate their funding portfolios and take a more pragmatic approach in deciding, who gets funding. This has caused a seismic shift in how fintech companies look at their operations, making them to now prioritise their revenue generation strategy. This is where banks – which have had more years experimenting with different revenue strategies – see opportunity and are capitalising on it.

The bank-backed startup launched in June 2022 recorded N1.15 trillion in gateway and switching segments in less than one year of operation. The company’s report also showed that it became a profitable business within one month of launch and had hit N200 billion in monthly transactions by January 2023.

Although Squad’s transaction volume is about 5.8 percent of the N19.82 billion reported by GTCO in its first quarter report, experts say it is very significant in the context of a startup that is less than a year in the market. Squad’s performance further shows the extent to which Nigerian banks are going to secure their top share of the market in financial services amid a very motivated fintech ecosystem.

GTCO launched Squad in June 2022 with N3.5 billion ($7.59 million) in startup capital. Access Holdings, Stanbic IBTC Holdings, WEMA Bank and Sterling Bank Limited have all launched digital banking subsidiaries including Hydrogen Pay, Stanbic IBTC Financial Services, ALAT and Alternative Bank Limited respectively.

In March, Zenith Bank said it had received approval-in-principle from the Central Bank of Nigeria to convert its present operational structure to a holding company. Once the bank gets substantive authorisation and the licence is delivered, Zenith plans to veer into other businesses within financial services including pensions, insurance, asset management and fintech.

In 2021, Mr. Segun Agbaje, Group CEO of GTCO, said the plan was to push HabariPay to unicorn levels quickly. HabariPay carries its payment operations through Squad. From the beginning, Agbaje had his eyes on startups like Paystack and Flutterwave.

Although Herbert Wigwe, GMD/CEO of Access Holdings, on the other hand, does not use the term “unicorn” to describe the size of Hydrogen’s ambition, nothing suggest that the plan is any less enormous.

“The idea is that wherever you are in the world, if you are making payment to anyone on the continent, one out of every three transactions that come into this continent will be settled on Access Bank’s platform,” Wigwe told shareholders at Access Holdings’ statutory meeting in Lagos in December 2022.

Hydrogen Pay’s services cuts across lending, physical and virtual payment card issuance, fraud detection, recurring payments, storefront, inventory management, accounting, and bookkeeping.

Reaping big

Investors’ presentation documents sourced from GTCO showed Squad, which targets micro-merchants, small and medium scale enterprises, as well as, large corporates recorded a profit before tax of N926 million in the first six months of its operations, while its revenue for the period stood at N1.52 billion. Between June and December 2022, GTCO said Squad generated a total of N139.3 billion through its Gateway and Switching system, while international payments transactions within the period stood at $175,927.

Scorecards of the Nigerian banks show that the lenders continued to harness fintech in H1 2023, reaping a substantial N192.010 billion in revenue from electronic ventures. This marks a notable 20.32% surge from the N159.577 billion in H1 2022.

United Bank for Africa Plc (UBA) and Access Holdings Plc emerged as the frontrunners in e-business income, with UBA netting N51.076 billion and Access Holdings amassed N43.948 billion. FBNH, Zenith Bank Plc, and GTCO also ranked among the top earners.

In tandem with the e-business revenue upswing, these Nigerian banks posted robust pre-tax profits of N1.665 trillion in H1 2023, signifying a remarkable 132% uptick from the N716.943 billion reported in the corresponding period of 2022.

This impressive e-business revenue expansion underscores the escalating adoption of fintech solutions in Nigeria, even with the challenges posed by the Central Bank of Nigeria’s currency redesign and cash swap in Q1 2023.

Ademola Okuleye, senior director of Cellulant, a digital payments platform, believes Squad, Hydrogen Pay, and other banks’ spin-offs have an edge over the stand-alone fintech firms. He said the banks’ startups would gain from an established reporting framework that necessitates transparency. This instills confidence in investors, stakeholders, and consumers in the business.

“Investors and the public often perceive bank-backed fintechs to be more stable and less risky than standalone fintech startups. It’s a major valuation advantage to them,” Okuleye said.

“Most investors are now interested in revenues and profit, as against gross processed value. Access to free/cheap investors’ funds is no longer the same as they now demand for short-term returns.”

Fizzling threat

According to a recent report from Moody’s Investor Service, the competitive threat of fintech companies to big banks diminished over the past year, as rising interest rates constricted funding.

A decline in venture capital funding in 2022, particularly hurt fintech firms that rely on outside capital to fund their operations and acquire clients, Moody’s analysts wrote in the report. The report cited figures from CB Insights that showed global fintech funding fell 46% from 2021 to 2022.

Traditional banks that have long benefited from established brands and customer relationships have accessed stable deposit funding over the past year, which has given them an edge over many fintech companies, Moody’s said.

Banks have long recognized that technology could disrupt business models and allow technology conglomerates to enter banking, Moodys said. “They have been aggressively defending against such risks, either through increasing their spending in technology or through partnerships.”

Fintech companies often face more regulatory obstacles than banks and may have encountered new requirements in certain jurisdictions in recent years, according to Moody’s. In Australia, for example, regulators in 2021 updated the country’s licensing framework for new depository institutions and are considering how to bolster their oversight of consumer credit.

According to the report, although the current macroeconomic environment may pose challenges to fintech companies, the sector still has the potential to increase financial inclusion and lower costs to consumers.

“As has happened in previous market cycles, it is likely that a large number of nascent fintechs with weaker business models will disappear, and a handful will survive and prove truly disruptive over time,” Moody’s said.